Appropriation Bill: briefing by National Treasury

04 July 2014

Chairperson: Mr S Mashatile (ANC)

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Meeting Summary

The National Treasury gave a presentation on the 2014 Appropriation Bill. Fiscal policy was guided by counter-cyclicality, debt sustainability and intergenerational fairness. Payments for financial assets was the fastest declining area of expenditure. Payments for capital assets grew substantially. Compensation of employees growth declined strongly. Growth in transfers and subsidies declined marginally. Infrastructure investment supported long term growth and development. There was increased investment in social infrastructure.

The largest components of the Appropriation Bill were vote shares. Social Development; Police, and Cooperative Governance and Traditional Affairs received the largest percentages of the total Bill appropriation. The Department of Public Service and Administration was leading a process to give administrative effect to the President’s new Cabinet portfolios.

Over the medium term, government would balance continued support for economic recovery with fiscal consolidation. The National Treasury was working with provincial treasuries to identify inefficiencies and improve provincial spending.

The Committee discussion was animated and forthright. The National Treasury had to field some tough questions from Members, especially about borrowing. Members did not hesitate to examine the role of the Treasury itself, and there were some critical remarks from the EFF to the effect that the National Treasury priorities seemed in conflict with government monetary policy and imperatives. Funding of the new Cabinet portfolios through memoranda of understanding with existing departments aroused interest and led to critical questions about the accuracy of the initial budgeting and priorities. Questions and remarks were made about debt service costs and cost containment measures, and the need for strict consequences for those who shifted ring-fenced allocations or wasted State money in tender processes. Indirect grants caused concern, as they pointed to lack of capacity to spend in local governments. There were questions about investment in skills development and especially in the higher education sector. Members were critical of large amounts that had “milked” the State, charged by consultants and service providers. Remarks were also made about collusion by large companies that was preventing smaller players from entering the market. The EFF told the National Treasury that it saw the borrowing as contrary to the principle of intergenerational fairness. The EFF was also severely critical of the dramatic increase in the defence budget vote, and asked for an explanation. It was asked what the National Treasury did about assisting and monitoring departments headed for a qualified audit opinion, before the auditing process. Finally, the Chairperson summarised the role and some of the future work of the Committee.

Meeting report

2014 Appropriations Bill: National Treasury briefing
Mr Michael Sachs, Acting Deputy Director General: Budget Office, National Treasury, noted that the most important document with regard to the Appropriations Bill was the bulky Estimated National Expenditure (ENE) document. The Appropriations Bill (the Bill) was not yet an Act, but departments were already spending. However, the Public Finance Management Act (PFMA) allowed for that. The Bill was divided by vote and by main division within a vote (i.e. by programme). The aim and purpose of the vote, and the total budget by vote, were especially relevant.

Fiscal policy was guided by counter-cyclicality, debt sustainability and intergenerational fairness. The National Treasury (NT) was working with provincial treasuries to identify inefficiencies and to improve provincial spending.

Mr Sachs explained the structure of the consolidated budget. Provincial budgets were financed by transfers from the main budget and other revenue sources. Payments for financial assets was the fastest declining area of expenditure. Payments for capital assets grew substantially. Compensation of employees growth declined strongly. Growth in transfers and subsidies declined marginally. Infrastructure investment supported long term growth and development. Public sector infrastructure expenditure for the following three years would be R847 billion. Spending was growing in priority areas. There were increased investments in social infrastructure.

The largest components of the Appropriation Bill were vote shares. Those were Social Development; Police; Cooperative Governance and Traditional Affairs; Transport; Defence and Military Veterans; Higher Education and Training; Health; Human Settlements and Justice and Constitutional Development.

The Department of Public Service and Administration was leading a process to give administrative effect to the President’s new Cabinet portfolios. Once new organisational structures were known, changes to vote and programme structures and financial allocations would be included in the Adjustments Appropriation Bill, 2014, and/or in the Appropriation Bill, 2015.

Discussion
Mr N Gcwabaza (ANC) asked about the funding of the new Department of Small Business Development through the Department of Trade and Industry (dti), by means of a Memorandum of Understanding (MOU). He asked if the Treasury would fund the dti, or whether the dti would be using its own budget.

Ms Raquel Ferreira, Director: National Budget, National Treasury, replied that funds would be from the dti’s own budget. If that was not sufficient, recourse could be made to funding for unforeseen expenditure.

Mr M Figg (DA) referred to re-allocations for new departments. If funding for the three new Ministries had to come from elsewhere, then this surely implied that it had not been necessary to include that funding at the original sources from which it was now being taken.

Mr Sachs replied that Parliament decided on allocations. There was an opportunity to make adjustments in October. There had to be flexibility in a trillion rand budget. There was underspending every year. The policy was to establish an expenditure ceiling, to say how much could be allocated, but resources were not to be added. All financing was from existing budgets. Money was shifted on the basis of priorities.

Ms Ferreira added that the National macro-organisation of the State (NMOS) project dealt with existing functions and funds shifted to new institutions.

Mr Sachs used the example of the former Department of Women, Children and people with Disabilities. As the new Ministry for Women had been created, functions from the former department would be shifted to the new Ministry.

Dr C Madlopha (ANC) referred to high debt service costs (slide 8). A 3.7% decrease was envisaged for the medium term expenditure framework (MTEF). She asked how costs would be cut.

Mr Sachs replied that it was not a matter of reducing debt service costs, but of slowing down the rate of growth. The graph showed how much each item increased in a year. Debt had increased fast during 2009/10, because there had been a 7% deficit. Debt service costs still increased, but at a slower rate.

The Chairperson asked if the country was borrowing less.

Mr Sachs replied that that was not the case. Currently, there was borrowing to sustain growth. The high deficit had added to the stock of debt. Borrowing less would only become possible by 2017.

Dr Madlopha referred to cost containment measures. Departments had not shown the capacity to implement this in the past. She asked where national departments would get the capacity. She asked if consultants would have to be used to identify issues.

Mr Sachs replied that the situation where consultants coordinated other consultants had to be addressed. Core functions were being eroded. However, consultants had done some good work.

Mr Sachs added that the monitoring of cost containment instructions was auditable. The National Treasury was monitoring spending on consultants more closely. There were large amounts involved, but they were being spent on important matters, usually for contractors.

Mr G Gaarde (EFF) asked about fiscal imperatives.

Mr Sachs replied that fiscal policy was anchored by the principle of counter-cyclicality. Demand was boosted in a poor economy. If a Member was to lose his/her seat in Parliament, and the President wanted to appoint that Member as an ambassador and then had to go without pay for four months, it would not do to reduce expenditure. When there was less GDP income, there was less government income. Taxes were reduced in 2009/10, but expenditure was not reduced, so that the economy could grow. The challenge was that growth had not recovered, which made counter-cycling difficult. At a 2% growth rate, taxes were lower, which added to the stock of debt. A budget ceiling was part of the fiscal policy framework. It would R1.1 trillion for the following year. New priorities would be financed within the ceiling.

Mr Gaarde asked what Treasury did when ring-fenced allocations were shifted. People in charge of Municipal Infrastructure Grants (MIGs) who shifted allocations, had to be held accountable.

Mr Steve Kenyon, Director: Provincial Budgets, National Treasury, replied that the provincial Departments of Cooperative Governance were responsible for coordinating ring-fenced allocations. He explained that a differentiated approach was used with regard to direct and indirect grants. Indirect grants were mostly municipal money, and were granted where there was a capacity to spend. Electrification had been moved from direct to indirect grants. There was a lack of spending capacity. Where spending capacity was lacking, national departments could spend on behalf of local municipalities.

Dr Madlopha remarked that indirect grants caused concern. After 20 years of democracy, there was not yet local government capacity. The question was who was responsible for indirect grant dumping, when the lower spheres could not spend. She suggested that indirect grants were not the solution.

Mr Kenyon replied that the previous Committee had shared that concern. There had been no formal response from the Minister. New conditions had been added to conditional grants. In time, provinces could take over infrastructure.

The Chairperson noted that the Minister had indeed sent a response the day before, which dealt with creating local capacity.

Mr N Kwankwa (UDM) remarked that there had to be a system to ensure that new departments had funds.

Mr Gcwabaza referred to the growth of spending on higher education (slide 9). There was a sharp decline over the 2014 to 2017 period. He asked if there would be a lower intake of students, and if so, what the reasons might be. It could result in there being no real growth of skills among blacks. He asked how the Treasury checked if there was value for money. Outcomes showed no growth of skills among Africans. Questions were not asked about the use of money for real outcomes. Education was a main contributor to economic growth.

Mr Sachs replied that in the current budget vote, the Department of Higher Education was asked about performance targets on the budget. If the number of students grew, the Department would be funded accordingly. This Department was also asked about the quality of graduates, to ensure that there would be value for money. There had to be integrated mechanisms for proper use. Parliament was central to the budget process. He emphasised that the fact that money was shifted did not mean that there should not have been budgeting in the way it had happened. There was no such thing as a perfect allocation. The Higher Education sector grew faster than Basic Education. A reduction did not mean wasting money. He again reminded Members that there was still the option to add resources to the budget in October.

Mr Gcwabaza asked about economic infrastructure and services. He asked how economic services were defined.

Mr Sachs replied that definition of groups had been refined. For instance, Medupi power station had been built by Eskom. Economic services were provided by the Departments of Trade and Industry, and Agriculture.

Mr E Shaik Emam (NFP) remarked that debt was also incurred by municipalities and provinces, and from borrowing. There was ambiguity about travel expenses allowed for Parliamentarians. Parliament was saying that the upper limit for accommodation was R1 850 per night, and the Treasury was saying R1 300. Departments were complaining that they were not receiving funds on time, and were flooded in the latter part of the finance year.

Mr Sachs replied that provinces and municipalities did not have large debts. Provinces were not allowed to accumulate debt. They could only borrow for capital expenditure. Only the big metros could borrow.

Mr Shaik Emam asked what mechanism there was to ensure that money for new Ministers and Deputy Ministers, coming from other departments, was used timeously. If that money had not been used by such departments, it meant that they had failed to spend it.

Mr Shaik Emam asked how spending was contained within the ceiling, unless money was taken from departments that were not performing.

Mr Sachs replied that all institutions were auditable. Cost containment could be monitored.

Ms S Shope-Sithole (ANC) said that she had worked with the Department of Justice and Constitutional Development, where the Head of Court Services had said that the Department had to be able to control its budget. She asked what the implications were in terms of the separation of powers.

Mr Sachs replied that Parliament wanted more control of the budget.

Ms Shope-Sithole noted that borrowing continued. The country had enough resources. She asked about any strategy to recover money lost on tenders. Such money had to be recovered, or else certain tendencies would be repeated. A statement had to be made that no one could escape consequences of wrongdoing. It was unacceptable to have people milking the State. Misappropriated funds had to be recovered.

Mr Gcwabaza asked about Eskom borrowing, with the National Treasury as guarantor.

Mr Sachs replied that R300 million had been guaranteed to Eskom. R150 million had been borrowed against the guarantee. Eskom operated as a stand-alone enterprise, with its own revenue and expenditure. It was not financed from the fiscus. Its debts were shown on its own books.

Ms Shope-Sithole noted that the question of recovering lost money had not been answered. Lost money could ruin a department. There had to be a commitment to recover stolen money. She was from Limpopo, where unemployment, poverty and illiteracy were rife. Challenges could not be addressed if money went down the drain in municipalities through the supply chain.

Mr Sachs replied that the Office of the Auditor-General did audits. There had been a budget review the previous year. The control environment had to be strengthened. There were 68 investigations, and of R503 million lost. R65 million was surrendered. The problem extended beyond the Treasury into the criminal justice system.

The Chairperson noted that SARS had audited 300 businesses. R10 billion was involved.

Mr M Figg (DA) asked about a centralised procurement system (slide 6). He asked if local service providers could lose out because of that.

Mr Sachs replied that policy development was needed for centralised procurement. The Chief Procurement Officer had to look at tender irregularities. It was not possible to centralise all tenders. Flexibility was needed. Transversal contracts were identified. The Portfolio Committee could do well to talk to Chief Procurement Officers.

Mr Gaarde referred to intergenerational fairness. Debt had risen from R500 million to R2.3 billion in five years. It had to be conceded that it was not fair to coming generations. Borrowings were financing wastage. National Treasury did not invoke its powers to withhold funds if there was no finance management capacity. Children had to share in asset investment.

Mr Gaarde also remarked that the President had made mention of a defence budget review. Investment in defence infrastructure had jumped from R1 billion to R2 billion. He asked if it was fair to finance a 100% increase. Investment in public works infrastructure went from R500 million to R840 million. There was additional expenditure on assets that coming generations would not share in.

Mr Gaarde remarked that in his view, National Treasury priorities did not have the potential to assist government to reach fiscal policy objectives. They were in conflict with the monetary policy of the state. Borrowing would increase in spite of unemployment. He asked if borrowing could assist the State to achieve macro policy imperatives.

Mr Sachs replied that Parliament could adopt a fiscal framework, but could not currently amend it. This would have to wait for the following year. National Treasury was also worried about debt accumulation. Wastage had to be eliminated through reprioritisation.

Ms Shope-Sithole suggested that National Treasury take the Committee through the Estimates of National Expenditure (ENE) book. She had approached the Department of Higher Education and Training, to establish community education. There had to be skilling of those presently unskilled, to decrease unemployment.

Mr Sachs agreed that the National Treasury had to help the Committee understand the ENE. It was said that the Treasury documents were most transparent, but Parliament had to engage with them.

Mr Gcwabaza endorsed what Ms Shope-Sithole had said. Construction companies had milked the State, and had to pay back. He disagreed with Mr Gaarde that Parliament could decide not to pass the Appropriations Bill. Parliament had to pass it, as one of its functions.

Ms Shope-Sithole added that there was no need for stress. There were enough ANC Members to pass a budget.

Mr Gcwabaza remarked that government had neglected infrastructure for blacks before 1994. Debt was being paid currently for that neglect. Infrastructure had to be maintained. There was the choice between borrowing and paying back, with resulting growth, or not borrowing with a resulting lack of growth.

Ms R Nyalungu (ANC) asked about the relationship between this Standing Committee and the Standing Committee on Public Accounts (SCOPA). She asked when debts would start to come down.

Mr Sachs replied that he hoped that debt would stop growing within a three year period. It had to grow slower than the GDP. Things could begin to stabilise in the following year. A high level of debt was due to a big shock to the economy. Growth was needed to rebuild. If a 3.5% to 4% growth rate had not been reached by 2017, there would be problems.

Ms M Manana (ANC) said that prevention was better than cure, when it came to proper use of budgets. It was not sufficient to have to wait for an Auditor-General report. She asked how monitoring could be done before that, and what the correct procedures were.

Mr Shaik Emam referred to the use of consultant services for procurement. Other services held a potential for abuse. There was the problem of budgeting for items being more costly than the items actually were. He asked if there was a system to check that there was the same pricing structure. It was a problem if pencils were budgeted for at the price of R10 per item, when the actual value was R1.

Mr Sachs replied that stringent targets were set for procurement levels by government. The challenge was how to balance central procurement and the promotion of local suppliers. Things could not be transversal across the board, as for example with regard to anti-retrovirals. The Chief Procurement Officer reviewed practices to develop a reference system about how much government had to pay. New mechanisms were developed. Government paid more than the private sector.

Ms Shope-Sithole said that the National Treasury and the Department of Finance were responsible for economic growth. She asked who was looking at obstacles. There were practices, like collusion among big companies, that resulted in preventing new entrants, so small players were stopped. She asked what could be done about it.

Mr Sachs replied that the whole of government was responsible for economic growth. The Competition Commission had to prove collusion. Monopoly pricing was looked at, to see when prices were too high for competition. The Department of Small Business Development would look at the position of new entrants.

Dr Madlopha referred to vacant posts in departments. Keeping people in “acting” posts caused a loss of skill in other places, and led to spending on consultants. There had to be an audit to see if departments had the skills for their mandate. Consultants were hired and there was underspending, and these were worrying trends.

Dr Madlopha asked about the role of National Treasury to supply skills for intervention when a department was headed for a qualified audit opinion. She asked about monthly audits of expenditure trends, and if there was an intervention strategy. The question was why there were qualified reports at all, when the Treasury could intervene early.

Mr Sachs agreed that there had to be intervention before the Auditor-General’s report. The problem started with budgeting. A budget should not grow faster than inflation. A quarterly monitoring system had been put in place. The National Treasury could intervene on the basis of monthly reports. There had to be an ongoing debate with departments. Expenditure trends were monitored. Audit skills in departments caused concern.

Ms Ferreira added that the public finance team interacted monthly. There was a quarterly presentation to Parliament. According to the PFMA, the Accounting Officer had to assume responsibility for the process.

Mr Kwankwa asked if borrowing was a function of current expenditure.

The Chairperson replied that borrowing was always related to capital expenditure, not current expenditure.

Mr Sachs replied that borrowing was indeed for capital expenditure, but if there was a temporary shock there could be borrowing for consumption.

Mr Gaarde noted that the question of the dramatic increase in defence infrastructure spending had not yet been answered. He asked about reasons for that 100% increase. He wondered if there was another arms scandal on the way.

Mr Sachs replied that the defence infrastructure budget was not the outcome of refurbishment of military bases. The military budget had been under pressure. Defence expenditure was lumpy. The purchase of an aeroplane or a ship could have great impact on a budget. R1 billion rand sounded much on its own, but it was not much in a trillion rand budget.

The Chairperson added that defence budgeting included amounts for peacekeeping in the Democratic Republic of the Congo and Sudan, and to combat piracy in the Mozambique channel.

The Chairperson concluded that the Standing Committee awaited reports. Government departments had to be held accountable. The Committee would play a role in prevention, before SCOPA and the Auditor-General came into the picture. The Committee could raise alarm warnings. He noted that the Committee would meet twice before the report was finalised. There would be meetings with the Financial and Fiscal Commission and the Public Service Commission.